7. Fed Joining in Alarm Over Distortion It Enabled: Credit Markets

A Federal Reserve governor is joining those warning that junk-debt investors are poised for losses, while his institution’s policies spur them to keep buying the debt.

Yields on a record 38 percent of the $1.1 trillion of notes sold by the neediest U.S. borrowers were trading below the 10- year average rate for investment-grade debentures last month, Barclays Plc data show. Investors poured a record $1.3 billion into U.S. leveraged loan funds last week as covenants on the debt weaken the most ever.

The central bank’s policy of keeping benchmark borrowing costs at about zero for a fifth year is pushing investors into riskier debt, even as Fed Governor Jeremy Stein warns that the market for speculative-grade debt may be overheating. While U.S. prosecutors are suing Standard & Poor’s for deliberately failing to provide warnings against losses on collateralized debt obligations before the credit crisis, the government’s stimulus is fueling demand for similar products now...MORE